Financial Structure , Liquidity , and Firm Locations ∗

Firms that are located within industry clusters tend to make more acquisitions than their counterparts in the same industry that are not located within a cluster. As we show, if this increased tendency to acquire other firms arises because locating close to other industry participants facilitates acquisitions (e.g., by facilitating the acquisition of information), then firms located within clusters will have an incentive to (1) maintain more financial slack (2) the level of financial slack will be less influenced by the other determinants of the debt ratio and cash holdings previously discussed in the literature. Our empirical analysis of the capital structures and cash holdings of firms that are located within and away from industry clusters supports both hypotheses. ∗Work in progress. Comments are welcome. We would like to thank Aydogan Alti, Charles Hadlock, Simi Kedia, Roberto Rigobon and seminar participants at Baylor University, Boston College, Columbia University, Drexel University, Fundacion Rafael del Pino, Princeton University, Rutgers University, University of Michigan and University of Texas for helpful comments. All remaining errors are our sole responsibility. Corresponding author: [email protected]. 10:30 am – 12:00 pm, Room: ACC-310 FRIDAY, March 9, 2007 presented by Sheridan Titman USC FBE FINANCE SEMINAR